“One of the things we have added is all the services companies because this is a very unusual inflation. Usually in inflation there is falling demand but actually we are seeing rising demand. In inflation, we see unemployment rising, but actually because of the pandemic opening up, we are seeing rising employment. Against this backdrop, – multiplexes, hospitals, media companies, all the services companies, hotels are better to buy,” says Chakri Lokapriya, CIO & MD,
Yesterday, there was a little bit of enthusiasm for steel stocks. They showed some kind of recovery on the possibility of the government rolling back the export ban and duty that had been imposed. If inflation has peaked out and metal prices are coming down, this is not a good time for the metals pack. What is your take on the sector?
The rollback of the export duty on steel is positive for the sector as well as for India’s forex reserves. It brings in dollar revenues. Second for the companies and for the sector in itself, it allows them to balance between domestic and export demand. The export demand has been stronger than domestic demand and that was actually the original case to buy metal stocks and steel stocks before the export duties came in.
So if the duties are removed, then the valuations will benefit Hindalco NSE -0.58 % and Tata Steel NSE 0.24 % which doesn’t have factories only within India but outside India as well and therefore they will have a double benefit. The valuations have corrected and so if they remove those duties, it is clearly a positive and there would be a bias for these stocks.
Reliance NSE -0.63 % was making money because of the GRM spread. It is no longer making that kind of a windfall gain which means there is a case for the windfall tax to go back and for Reliance stock to move higher?
You are right in your observation. Clearly the windfall tax was on the expectation of excessive profit made by the company but oil prices have been very volatile and therefore GRMs have been volatile. The government has said that they will revisit the case every 15 days and so maybe it is time for them to indeed look at that.
Even for the past quarter, it is not that Reliance could have made the entire gain because of such volatility. It depends on its inventory levels and its other businesses. Yes, now that there is a new entrant into the telecom business, it lowers the multiple for the telecom business but still the sum of the parts of Reliance plus the new green energy holds it really well and the case for windfall tax does not hold water anymore.
Pick and choose –Star Health, Nazara Tech or Metro Brands. One of them, none of them?
The safest among this is Metro Brands. Metro Brands because it is a far more simpler business. In the case of Nazara Tech, there is a regulation risk. In the case of Star Health, there is a risk of pricing and slowdown which happens usually in economic slowdowns. Metro Brands is a higher margin business versus the other footwear companies and also it is well placed within the tier one, expanding fast into tier two and it is their across price points to suit the mid income market as well as upper ..
At the time of its valuation, Star Health was priced at the really high end of the multiple whereas on the other hand Metro at the current levels I think clearly looks worth investing in.
What have you added to your portfolio this fall?
One of the things we have added is all the services companies because this is a very unusual inflation. Usually in inflation there is falling demand but actually we are seeing rising demand. In inflation, we see unemployment rising, but actually because of the pandemic opening up, we are seeing rising employment. So against this backdrop, at least the small ticket items – multiplexes, hospitals, media companies, all the services companies, hotels are easier on the pocket for consumers to go out ..
Why is nobody talking about the tailwind called rupee for IT?
The rupee has fallen about 5% odd in the last couple of months and in spite of that, TCS NSE -0.27 %’s margins have fallen from a peak of about 25% by a good 200-300 bps. Every time there has been currency volatility, IT companies have not been able to take care of gains from that volatility because they do cross currency hedging. That has been one reason why the benefit has not happened.
Second, assuming that TCS in its conference call said that now they have viewed that rupee is going to continue to fall so maybe they will benefit from this rupee’s fall in the subsequent quarter given that margins have already happened because outside of visa cost and hiring costs, there has been no price negotiation to bring down the top line mix. So this cross currency hedging has been the issue for all the IT companies.
What would your approach be? The IT pack being is under immense pressure, metals tried to stage a comeback yesterday, banks have now started to move?
Talking about services companies, Apollo Hospitals NSE -0.34 % reported fairly good numbers in terms of at least the trend. Its occupancy is still only about 60% and so there is sufficient operating leverage on its sides.
Its case mix is improving. There has been very good traction in its digital business and they have sufficient cash to spend towards building the additional business. Its pharmacy business, in this environment, it is unlikely that online companies will discount further because they themselves have to conserve cash. So, Apollo Hospitals looks fairly good at these levels.
Source Name:-Economic Times